Working Paper: NBER ID: w12067
Authors: Raj Chetty
Abstract: This paper shows that existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (g) in terms of (1) the ratio of the income elasticity of labor supply to the wage elasticity and (2) the degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies randomly across states. Using labor supply elasticity estimates from thirty-three studies, I find a mean estimate of g = 1. I then show that generating g > 2 would require that wage increases cause sharper reductions in labor supply than estimated in any of the studies.
Keywords: No keywords provided
JEL Codes: D80; J20; J60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor supply behavior (J29) | Curvature of utility over wealth (D11) |
| Curvature of utility over wealth (D11) | Risk aversion (D81) |
| Wage changes (J31) | Labor supply (J22) |
| Labor supply (J22) | Coefficient of relative risk aversion (g) (D11) |
| Wage elasticity (J31) | Labor supply (J22) |
| Degree of complementarity between consumption and labor (D10) | Labor supply (J22) |